Pound bounces back as Scotland says 'No' in independence vote

Sterling has roared back to life, soaring to a two-year high against the euro and a two-week peak against the US currency, as traders took comfort that the Scottish referendum would fail to break-up the United Kingdom.

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He said traders began selling sterling about $US1.66 and it was close to clawing back its losses.

"This time next week probably nobody is going to be talking about Scotland," Mr Callow said.

"If you have a look at Scotland on Twitter or Google trends, it would be through the roof, the highest ever right now. But give it a few days and people will move along. And when you move along, you see a UK economy that's still fairly patchy really."

Sterling had enjoyed a strong rally from September last year, when it was fetching $US1.4856, until July, when it peaked at $1.7161.

Since then it has gradually drifted lower before falling sharply late last month, when the Scottish 'yes' vote began to gain traction.

Mr Callow attributed the currency's weakness in past months to confusing comments from the Bank of England, soft economic data, and a "strong US dollar environment".

"One of the trades of the first half of the year was to buy sterling. The UK was producing some strong economic data at that point and there were expectations from the Bank of England to tighten policy soon.

"And then the UK started to falter on the economic data and Bank of England Governor [Mark] Carney said some surprising things on the economic outlook that really cooled enthusiasm."

The Bank of England surprised the market last month when it indicated it would keep interest rates at historical lows until next year, saying that it did not expect strong earnings growth.

Mr Callow said inflation had also cooled, adding to the BoE's reluctance to lift rates.

"It's still an open question whether the BoE is the first central bank since the GFC to pursue quantitative easing, print money, and then raise interest rates. Still no one has done that.

"That's started to chip away at sterling. And the official inflation numbers aren't very threatening. They have trended down over the year," Mr Callow said.

He said at the end of last year the CPI rate was 2 per cent. "Now it's 1.5, so there is no inflation emergency that's for sure."

Still, Stephen Innes, a senior trader at OANDA Asia Pacific said the sterling rally "was quite a turnaround from the 10-month low the pound hit last week".

"Expect things to remain quite volatile in the currency markets leading up to the final tally being announced," he said.